Valuation

The Wall Street Journal describes two of the changes just proposed by the Obama administration impacting trust and estate law.

They are seeking to limit the use of Grantor Retained Annuity Trusts (or GRATs) by requiring that the minimum term be 10 years. The technique provides that property can be put into a trust and the post gift appreciation would not be subject to gift tax as long as the person remained alive at the end of the term. In order to seek to make sure they lived through the term more people had been using shorter terms as little as just 2 years for example. The minimum term sought to restrict the use.

The administration is also seeking to disregard some valuation discounts with the use of Family Limited Partnerships or other similar planning techniques to disregard lack of marketability and lack of control discounts which can allow for up to 40% discounts. For more information click on the link to the article at the top of the post.

Possibly the biggest change as it relates to estate planning is regarding how to value gifts. The law currently allows valuation to be different for estate and gift tax purposes than it is for income tax purposes although that will soon change. They indicate below how the law will change.

How to value a gift? On the gift and estate tax front, a new provision would require the reported value of a gift to be the same as the value declared when the recipient sells the gift and must declare capital gains or losses for income tax purposes.

Say a parent with a $1 million business gives equal shares to each of his three children. For gift and estate tax purposes, the value of the gift isn't 33% per child, but something less because no one child has control over the company. That reduces the gift tax liability.

But when the children go to sell the company, they may declare that their basis was 33% per person, which would decrease their capital gains tax liability. Under Obama's proposal they would have to report the same basis in both instances.

There have also been some proposals regarding not allowing Family Limited Partnerships and other techniques to adjust the valuation using lack of marketability discounts and lack of control interests when helpful to the taxpayer but have been proposals to stop this other than legit ongoing businesses where there are non tax motivations. Between these measures and the IRS hiring a large number of additional agents they are seeking to close loopholes and advanced planning techniques and collect more tax revenues.